According to the mainstream media over the past few weeks, surging petrol prices are a key reason why the Reserve Bank will lift interest rates next week.
“Melbourne Cup rate hike looms as inflation jumps in September quarter,” reported The Australian, driven by “surging petrol prices, rents and power bills”. The galahs at The Australian Financial Review, anxious to see the ordinary Australians they despise so much punished yet again, have demanded another rate rise because of “little prospect of relief from the $2-plus per litre petrol prices”…
Normally oil price rises and falls leave the Reserve Bank unmoved, especially if they lead to particularly volatile price movements, which are then excluded from the Bank’s preferred CPI measure — the trimmed mean, which excludes around 30% of the biggest price rises and falls.
But the commentariat has decided this won’t apply this time around because petrol price rises could mean inflationary expectations become embedded (a persistent and near-mythological fear of central bankers that, like the dreaded wage-price spiral, has little or no evidence behind it) and because the Israel-Hamas war has raised fears of Middle East instability, despite neither side having any role in oil production.
“Since Hamas’ bloody incursion in Israel, global oil prices have risen from their already elevated levels due to ongoing supply cuts by Russia and Saudi Arabia. Brent crude prices have steadily increased to near US$92 a barrel, while West Texas has almost reached US$89 a barrel,” News Corp reported.
Except… oil prices were easing last week: petrol prices in Sydney were at multi-month lows of between $1.72 and $1.85 a litre, after being $2.22 a litre in Sydney in late September and early October. In Melbourne, the last month has seen a consistent fall in prices to below $1.90. Brisbane prices are back to those of mid-October.
As of Tuesday, the final day of October, all those worrisome oil price rises of September and October had been wiped out and October saw big price falls — US and Brent crudes ended at two-month lows on Tuesday as traders fret more about future demand heading into 2024 than any dislocation to crude supplies from Middle East conflict.
If surging petrol prices are a justification for yet another punitive interest rate rise to satisfy the vultures and galahs of the financial markets and business press, why aren’t falling prices a reason to leave them on hold, or even cut them? More to the point, interest rate rises have no effect on non-discretionary demand for fuel. If you have to drive to and from work, or your business relies on road transport, you don’t alter your consumption to reflect higher or lower fuel prices.
Getting wiser about the responsiveness of monetary policy to different price rises is increasingly necessary. The rest of the century is going to see increasing volatility in prices as a shrinking workforce and climate change put upward pressure on production costs, even if we eventually transition to a much more stable supply of energy in the form of renewables. The inflation vulture attitude that sees every price rise as a reason to jack up interest rates will stifle growth and punish households while doing nothing to put downward pressure on prices.
As though they care about such finicky notions! Kicking up interest rates again is just another application of the old principle, ‘The floggings will continue until morale improves’.
Though in a somewhat unique twist, it’s actually “the floggings will continue because morale is still too high”.
The main thing interest rates should affect is, erm, borrowing because interest rates increase the cost of, erm, borrowing.
And what’s the thing that requires the most borrowing?
It begins with a H and the form of debt begins with a M.
So the price of H’s should go down due to the rise in the cost of M’s?
Right?
Wrong!
H’s are going up and up and up and up and up.
So what gives?
Your silly economic models aren’t making much sense are they?
Surely it couldn’t be as simple as supply and demand? As basic in accounting as it gets. What am I missing here. Ah, yes, follow the money!
Seems obvious that rates simply aren’t higher enough yet to discourage new lending.
https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release
This is probably helped by things like, say, the Federal Home Guarantee Scheme to enable mortgages with as little as a 2% deposit.
So the RBA is pumping the brakes while the Government is pushing down on the accelerator.
(And we haven’t started extending loan terms to 40 or 50 years yet to bring payments down even with the higher rates. Still plenty of life in the horse yet. Plus there’s a lot of people with equity who can buy without even needing a new mortgage.)
Yep. They can’t keep trotting out the well-worn excuse and argument that it is wage rises that are causing inflation or the expectation of wage rises. They have to simply change the record or rather, turn it over to Side 2. The less favoured side usually. (Refer A Hard Days Night, Led Zeppelin 1) Side 1, “Labour costs are burning” gets a bit worn out. Side 2 “Petrol price rises are burning a hole in my pocket” is this month’s RBA chart topper. I await their new album and they haven’t had a new album out for decades.
Apparently they can keep trotting out the same threadbare argument, because it seems they can do whatever the fck they like. Facts and justice cut no ice with the aristocrats.
I think Gilbert Gottlieb described the aristocrats best…
“..the Israel-Hamas war has raised fears of Middle East instability, despite neither side having any role in oil production.”
This is only true at face value. But you are not seeing the bigger picture. Israel v Hamas could blow out into Israel v Hezbollah and Israel v Palestinian Authority (basically the PLO). Iran has a big hand to play in and through Hezbollah, the Lebanese Shi’ite militia or Army. Hamas is supported in and to some extent by Egypt and Qatar. Hezbollah by Iran and to some extent Syria. There are geo-political and strategic implications in this struggle and scenario. What if this “small” conflict that is killing thousand every week blows up into a regional conflict and causes instability in some countries in the Middle East? As what happened in the Yom Kippur War of 1973. There are simply more economic implications in this conflict than in the Russian Ukraine war. The outlook is not good but if Biden can pull of a peace deal, if only temporary, he would and should be hailed a saviour. Then the Reserve Bank will have to find another bogey man. Back to the Australian worker and his high wages. Energy prices and rents can play along as 2nd and 3rd Violins.
How does all that impact what an RBA rate rise would do, as Bernard says it has no impact on whether we need to put petrol in the car or not, it simply takes more out of our pocket and puts it in the big bank shareholders
No I wasn’t making that argument. I am putting the argument that the Reserve Bank would like to put. Petrol prices factor significantly into inflation and flow through other sectors like transport and food. The RBA has a priority, misplaced in my view and in many circumstances, to bring down inflation. Petrol prices are an indicator of said inflation rate and if the inflation rate is still high courtesy of high petrol prices (through high oil prices on world markets) then the RBA, whether we like it or not, will react. Obviously, it is an incorrect reaction but it is what they have always done in response to inflationary pressures. You see, the RBA don’t care if you or any others are suffering because of high petrol prices. They won’t lay off putting interest rates up because you’re hurting. They want you to spend less on the other things you want and need. It’s wrong but they don’t care. Have to pay higher prices for petrol? Tough luck! say the Reserve Bank. Spend less on food then. Starve. See if I care, they say. Don’t go out to the pictures as much, don’t go for holidays or go for low budget ones. It is wrong but this is their logic. They don’t care about your suffering and don’t care if the banks that loan the money make more obscene profits through higher interest repayments. Don’t come to us. See your bank. Shop around they always say, as does Treasury. They just want to bring inflation down by getting you to spend less on other things, particularly things you may have some discretion over.
The elephant in the room is climate change. These tiresome distractions only serve to perpetuate climate change and further feeds their blindness to truth. The clock is ticking and time is now short, but quietly and alone, they hold dearly to their falsehoods, they’re by nature inconsistent, irregular, like they don’t belong, they never will belong even when the clock strikes midnight.